The IRS Targeting Scandal Was Fake, but IRS Budget Woes Are a Real Problem

Conservatives have been seething since 2013 over what they say was an unfair and imbalanced effort by the IRS to scrutinize right-leaning organizations more closely than other groups seeking nonprofit status.

As a new report from the Treasury Department’s inspector general for tax administration shows, the IRS did flag some conservative groups out of concern that they might be problematic. But it also paid the same kind of extra attention to liberal organizations with words like “occupy” and “progressive” in their names between 2004 and 2013.

So it’s now official. There was extra scrutiny but there was no liberal bias among the federal employees who determine whether new organizations that want to operate as nonprofits are legitimate – and therefore eligible for the tax-exempt status that goes with that designation.

As a former IRS lawyer who now researches nonprofit regulation, I am relieved to see the claim that the government exclusively targeted conservative organizations officially debunked. I believe this new report ought to usher in a serious discussion about a very real problem: The IRS is too cash-strapped to conduct its oversight of nonprofits of all kinds.

Creating a false narrative

This so-called scandal over what conservatives saw as the persecution of right-leaning nonprofits erupted at a meeting of Washington tax lawyers in May of 2013.

Someone asked Lois Lerner, then the director of the IRS Exempt Organization Division, to address concerns over how it had treated conservative social welfare organizations – nonprofits that may do unlimited lobbying.

She then apologized to tea party supporters for inappropriately using names to screen their applications and said her colleagues “didn’t use good judgment.” Since I was there, I was stunned to see how The Wall Street Journal covered this exchange because it struck me as very misleading.

The paper indicated that Lerner had admitted to “targeting” the tea party movement, which she didn’t do. It quoted her saying there was no partisan rationale, but most of the article was about conservative complaints regarding political bias.

Taking the Fifth

As is clear today, the government never exclusively gave conservative groups with “tea party” or “patriot” in their names more trouble than many others in a similar situation. But politicians and even late-night comedians like Jon Stewart bought and spread this false narrative.

Lerner made things worse by seeming to hide something when she took the Fifth when lawmakers tried to grill her. I think she did this because her attorneys believed testifying might put her at some risk of prosecution for perjury but not for “targeting” the tea party.

More investigations by congressional committees, the inspector general for tax administration and the FBI ensued, along with lawsuits against the IRS and its employees.

In fact, however, rather than proving that the IRS had picked on conservative groups, these inquiries detected managerial shortcomings. Nevertheless, Republicans proposed new laws to curb nonprofit regulation.

Congressional conservatives also tried (and failed) to impeach IRS Commissioner John Koskinen, who had nothing to do with vetting nonprofit applications.

IRS official Lois Lerner refused to answer questions from lawmakers about whether her team scrutinized the applications of conservative groups seeking tax-exempt status more closely than the paperwork filed by other organizations.AP Photo/J. Scott Applewhite

Equal-opportunity mismanaging

Nonetheless, I believe the inspector general was onto something in 2013 when it issued an earlier report that criticized how Lerner’s team handled this paperwork. The IRS was taking an average of 574 days to process applications from tea party groups and sometimes asking intrusive questions unrelated to the question of tax exemption.

The agency’s staffing shortage doesn’t excuse regularly leaving aspiring nonprofits in limbo for more than a year. Since new charities, social welfare organizations and other nonprofits depend upon a nod from the IRS to gain traction, the tax agency needed to find a way to respond faster despite budget constraints.

Even so, as the latest report shows, groups with terms like “occupy” or “progressive” in their names in some cases waited three years or longer for the IRS to process their applications for nonprofit status. This slow walking wasn’t partisan.

Regardless of the wait, most groups eventually gained nonprofit status. This latest document still doesn’t clarify whether the IRS applied the appropriate scrutiny – and there’s no legal definition of what that might be. Nor does it say how many conservative and liberal organizations have sought tax-exempt status or whether the percentage of groups the IRS denied was consistent across ideological lines.

Underfunding the IRS

I believe these long waits have more to do with budget cuts than bias. The Government Accountability Office, a nonpartisan congressional agency, recognized in 2014 that the tax agency’s budget and staff were too small to handle its nonprofit oversight responsibilities.

The situation has only deteriorated since then.

The overall IRS budget fell by about 18 percent in inflation-adjusted terms from 2010 to 2017, from US$14 billion to roughly $11.5 billion.

Today, the agency employs fewer people than it did in 2010. The number of its employees dedicated to auditing and vetting the nonprofit sector fell about 5 percent from 2010 to 2013, the GAO found.

The number of aspiring nonprofits gaining tax-exempt status rose over the past decade as rejections fell. The number of denials plummeted from 1,607 in 2007 to merely 37 in 2016.

Automating exemption

The IRS has reduced its nonprofit approval backlog with its new 1023EZ form, which lets new charities spending less than $50,000 a year automatically get tax-exempt status.

But this fix has opened a new avenue for fraud and abuse. The Taxpayer Advocate found that 34 percent of the groups granted tax-exempt status this way in 2015 and 26 percent of those green-lighted in 2016 weren’t eligible.

As the IRS tries to recover the credibility it lost in a fabricated scandal, automatically approving all these applications may create more serious problems.